5 Airline Stocks for 2014

The year 2013 was very kind to airline stocks. Two very different airlines -- Delta Air Lines and Spirit Airlines (NASDAQ: SAVE) -- managed to post gains of nearly 150%, and most other airlines beat the market easily, too.

Few, if any, airlines are likely to replicate those gains in 2014. Overall, airlines have come much closer to "fair value" after their strong 2013 performances. Still, there are some good opportunities left in the airline sector. Here are five top airline stocks that are well-positioned to outshine peers and the broader market in 2014.

The Hawaiian underdogHawaiian Holdings (NASDAQ: HA) has been one of my top picks for over a year now. While the stock has posted strong gains since the spring, it has plenty of upside left. The company's domestic business -- which involves interisland flying within Hawaii and flights from the U.S. mainland to Hawaii -- is firing on all cylinders.

The international business has been much tougher, lately. However, Hawaiian is taking a growth pause, which should allow its new routes to mature, leading to higher unit revenue. The carrier is also working to build ancillary revenue opportunities, such as extra-legroom seating, in-flight entertainment, hotel packages, and air cargo. All of these initiatives should lead to solid margin expansion and earnings growth in 2014.

The Mexico opportunityVolaris (NYSE: VLRS) is a fast-growing Mexican ultra-low-cost carrier that executed its IPO just a few months ago. Volaris is already the second-largest airline in Mexico, and it has a huge cost advantage over national flag-carrier Aeromexico, as well as most other Latin American airlines.

Volaris has an enormous growth opportunity. Photo: Volaris

Volaris can make money with very low fares, which allows it to stimulate demand in the highly price-sensitive Mexican domestic market. This makes Volaris potentially the biggest long-term growth opportunity in the airline sector. As Mexico and the rest of Latin America develop, it could become the Ryanair of the region. Any signs of progress toward that goal could cause Volaris stock to surge in 2014.

The little guy on the blockRegional airline Republic Airways (NASDAQ: RJET) is another airline with solid upside. The company recently sold off its Frontier Airlines unit -- something investors had been clamoring for -- bringing in $84 million of cash. Surprisingly, the company has not been rewarded for this milestone; its stock recently fell below $10 after reaching nearly $14 earlier in the year.

Stripping out the Frontier segment, Republic has grown earnings in its core regional flying business by more than 50% this year. The company has more growth ahead of it in 2014, as its new regional flying contract with American Airlines phases in.

Republic does have a high debt load and significant capital commitments, but these negatives are offset by its bargain valuation (seven times forward earnings) and highly predictable business. If the company can continue posting solid results in 2014, the stock could benefit from solid multiple expansion.

The disruptorJetBlue Airways (NASDAQ: JBLU) stock has rallied since American Airlines agreed to sell off slots and gates at a variety of congested airports as part of its merger with US Airways. Investors see a possible expansion at Washington's Reagan National Airport as particularly promising.

JetBlue has several big opportunities to boost earnings in 2014. Photo: JetBlue Airways

Yet JetBlue has even bigger opportunities elsewhere. In 2014, it will launch its "Mint" onboard product for transcontinental flights from New York to San Francisco and Los Angeles. This new service will offer a 16-seat, premium cabin with lie-flat seats, something not found on any JetBlue flights today. This will allow JetBlue to break into the high-margin premium travel business.

JetBlue also recently modified its aircraft orders in order to add more Airbus A321s -- which offer the lowest unit costs in its fleet -- while deferring all deliveries of the higher-cost Embraer E-190 until 2020 and thereafter. This move will finally allow JetBlue to reverse the cost creep of recent years, boosting its margins. As JetBlue's margins rebound, investors should benefit from explosive earnings growth.

The holdoverWhile Spirit Airlines narrowly posted the best performance in the airline industry in 2013, it still looks like a good stock for 2014 and beyond. The company's industry-leading cost structure allows it to reliably earn a high-profit margin despite consistently charging lower fares than its competitors.

Spirit Airlines stock surged in 2013, but it could outperform again in 2014 (Photo: Spirit Airlines)

Spirit's growth will slow in 2014, but only temporarily. The carrier is scheduled to receive 18 new airplanes in 2015 -- more than it will receive in 2013 and 2014 combined! That will allow a growth rate of 30% or greater in 2015. The company plans to grow about 20% annually beyond that. As investors become comfortable with this growth rate, Spirit's stock could benefit from multiple expansion. It currently trades for just 15 times forward earnings, which is less than the market multiple.

Foolish conclusionAfter the airline industry's remarkable run in 2013, investors need to pick their spots well in 2014 to continue beating the market. While a lot of investor excitement has focused on the largest airlines, niche carriers may provide the biggest opportunities in 2014.

The five carriers I have highlighted here -- Hawaiian Airlines, Volaris, Republic Airways, JetBlue Airways, and Spirit Airlines -- all have above-average growth prospects. However, they also have very reasonable valuations. This makes them good stocks to consider for 2014.

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JBLU is the only airline worth buying. If you're looking for a company that you can be proud to own. They treat their customers with respect, don't nickle and dime them to death, and I think in the long run will earn them an extremely loyal following.

As a long time US Airways flyer, I recently flew JBLU for the first time and won't be going back if I don't have to. JBLU is an extrodinary flying experience in a time when flying is anything but extrodinary, and truthfully is a complete pain. Bigger humans, less leg room, and higher fee's is not the method that JBLU has taken.

Go ahead fly JBLU and I promise you won't want to ever fly another airline again. The last time I had a flight experience as pleasent as a JBLU flight was on Singapore Airlines.